Hindustan Zinc – 3QFY2011 Result Update - Angel Broking

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Hindustan Zinc – 3QFY2011 Result Update

Angel Broking maintains a Neutral view on Hindustan Zinc.

Hindustan Zinc (HZL) reported net revenue of `2,601cr, higher than our estimate
of `2,374cr, mainly due to higher-than-expected zinc and lead concentrate sales
volumes. Net profit at `1,290cr was also above our estimate of `1,126cr.
Strong sequential performance: HZL’s net revenue grew by impressive 20.3% qoq
to `2,601cr due to higher zinc, lead and silver realisations, which witnessed qoq
improvement of 14.2%, 17.5% and 34.2%, respectively. Further, top-line growth
was supported by zinc and lead concentrate sales of 36,000dmt and 12,800dmt
(concentrate sales were nil in 2QFY2011), partially offset by a 14.7% qoq decline
in lead sales volumes on account of maintenance shutdown at the Ausmelt and
ISF smelters. Thus, led by higher realisations, EBITDA came in at `1,507cr, up
33.9% qoq, as margins expanded by 591bp qoq to 57.9%. Further, other income
grew by 12.5% qoq to `207cr, which resulted in net profit growing by 35.9% qoq
to `1,290cr.

Stock split and bonus: The Board of Directors approved the bonus issue of 1:1
and stock split of 5:1 during the quarter.
Outlook and valuation: Currently, the stock is trading at 8.1x FY2011E and 5.9x
FY2012E EV/EBITDA. HZL is expected to benefit from the expansion of zinc-lead
smelting capacity and increased silver production. Further, HZL had a huge cash
balance of `13,092cr as of December 31, 2010 (`310 per share). We maintain
our Neutral rating on the stock.

Top-line grew on the back of higher prices
HZL’s mined zinc production was higher by 11.3% yoy and 8.5% qoq to 222,249
tonnes in 3QFY2011. Zinc metal sales volume grew by 20.9% yoy and 1.7% qoq
to 178kt on account of increased contribution from Dariba Hydro zinc smelter
(commissioned in 4QFY2010), which produced ~46,500 tonnes in 3QFY2011.
However, lead metal sales volume declined by 36.7% yoy and 14.7% qoq to
12,338 tonnes due to maintenance shutdown at the Ausmelt and ISF smelters.
Moreover, saleable silver production declined by 8.0% yoy and 7.3% qoq to
32,777kg, while silver sales declined by 21.4% yoy and 19.9% qoq to 29,524kg.

During 3QFY2011, on a sequential basis, zinc and lead realisations grew
impressively by 14.2% and 17.5% to US $2,473/tonne and US $2,659/tonne,
respectively. On a yoy basis, zinc and lead realisations grew by 3.3% and 6.5%,
respectively. Average silver realisations increased by 46.4% yoy and 34.2% qoq to
`39,398. Thus, net revenue increased by 17.4% yoy and 20.3% qoq to `2,601cr.
Operating performance
Thus, led by higher realisations, EBITDA increased to `1,507cr (up 33.9% qoq and
8.7% yoy), as margins expanded by 591bp qoq to 57.9% but contracted by
459bp yoy. Further, other income increased by 12.5% qoq to `207cr, which
resulted in net profit growing by 35.9% qoq to `1,290cr.

Expansion projects
􀂄 The 100ktpa lead smelter at Rajpura Dariba has been delayed by a quarter
and is expected to be commissioned by 4QFY2011E.
􀂄 The Sindesar Khurd mine commenced trial run towards the end of 3QFY2011.
􀂄 The second unit of the 160MW captive power plant at Dariba smelter has
commenced trial runs in 3QFY2011.

Outlook
Zinc – Metal surplus to decline in CY2011
As per ILZSG, global zinc usage is expected to grow by 6.3% to 13.07mn tonnes in
CY2011. Refined zinc production is expected to grow by 5.6% to 13.30mn tonnes
in CY2011. Hence, global zinc metal supply is likely to remain in surplus by
161,000 tonnes in CY2011E.

Lead – Metal surplus at 90,000 tonnes
As per ILZSG, global lead usage is expected to grow by 5.8% yoy to 9.55mn
tonnes in CY2011E. However, supply is also expected to grow by 5.8% yoy to
9.64mn tonnes. Hence, lead metal is expected to remain in surplus by 90,000
tonnes in CY2011E.

Valuation
Currently, the stock is trading at 8.1x FY2011E and 5.9x FY2012E EV/EBITDA.
HZL is expected to benefit from the expansion of zinc-lead smelting capacity and
increased silver production. Further, HZL had a huge cash balance of `13,092cr
as of December 31, 2010 (`310 per share). We maintain Neutral on the stock.

We have revised our FY2011E and FY2012E estimates to factor in increased zinc,
lead and silver prices. However, we have lowered our FY2012 sales volume
estimates, factoring in the delay in lead expansion. Nevertheless, our overall
FY2012E net sales are revised slightly upwards as we have raised our zinc and
lead price assumptions.